Alison Frankel

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(Reuters) – Argentina’s contempt for the U.S. court system is not even debatable. Argentine officials have openly jeered at court orders enjoining them from making payments to bondholders who participated in Argentine sovereign debt restructurings without also paying more than $1.5 billion to hedge funds that hold defaulted bonds. The government has run newspaper ads vowing not to capitulate, has attempted to bring an action against the United States at the International Court of Justice in The Hague and, most recently, pushed through legislation authorizing its government to replace BNY Mellon with a state-controlled bank in Buenos Aires as the exchange bond trustee, after BNY Mellon made clear that it would not process payments for fear of violating the U.S. injunctions. Contempt, as it’s ordinarily defined, practically drips from the words of Argentine politicians when they talk about U.S. District Judge Thomas Griesa of Manhattan, who has presided over their standoff with the holdout hedge funds for nearly a decade.

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There’s been a lot of talk in the Argentine debt crisis about whether U.S. courts have overstepped their bounds. At the end of 2011, you’ll recall, U.S. District Judge Thomas Griesa of Manhattan ruled that the pari passu, or equal treatment, clause of Argentina’s bond contracts entitles hedge fund holdouts that refused to participate in debt restructurings to payments alongside the more obliging exchange debtholders. Since then, Argentina and its allies, including the U.S. Justice Department, have argued that Griesa’s interpretation of the pari passu clause — which was subsequently affirmed by the 2nd U.S. Court of Appeals and left intact by the U.S. Supreme Court last month — gives too much power to creditors and undermines sovereigns.

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The hedge fund NML Capital is going to have to execute some fancy footwork to maintain its argument that Argentina is plotting to evade a ruling by the 2nd U.S. Circuit Court of Appeals that prohibits the foreign sovereign from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds.

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France, Brazil and Mexico told the U.S. Supreme Court this week that the 2nd Circuit Court of Appeals has endangered sovereign debt markets with its ruling last year against the Republic of Argentina. In amicus briefs supporting Argentina’s petition for Supreme Court review, the foreign sovereigns argue that the 2nd Circuit gravely misinterpreted the so-called “pari passu” (or equal footing) clause of Argentina’s sovereign debt contracts. By ruling that Argentina may not pay bondholders who exchanged defaulted bonds for restructured debt before it pays hedge fund creditors that refused to exchange their defaulted bonds, the amicus briefs argue, the 2nd Circuit has undermined international debt restructurings, permitting vulture investors to hold entire foreign economies hostage.

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Distressed debt investors don’t have much credence as victims. These are, after all, hedge funds that buy up bonds in or near default, typically at a steep discount, in the hope they’ll be able to boost the value of the debt through the bankruptcy process or litigation in U.S. courts. Right now, for instance, distressed bond funds are preparing for battle over billions of dollars worth of Greek sovereign debt that they snatched up in anticipation of that country’s default in March. Distressed debt funds quite literally feed off the flesh of moribund companies and foreign economies, which is why they’re frequently called vulture funds. Vultures flanked by crafty lawyers aren’t entitled to a whole lot of sympathy.

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For vulture funds holding defaulted Argentinean bonds, the U.S. Court of Appeals for the Second Circuit has been a brick wall with only the tiniest of chinks. In recent years, the appellate court has rejected all sorts of clever stratagems the bondholders and their lawyers have dreamed up in an effort to get their hands on Argentine assets, including an attempt to attach assets belonging to Argentina’s central bank and pension system.

Author Profile

Alison Frankel updates On the Case multiple times throughout the day on WestlawNext Practitioner Insights. A founding editor of the Litigation Daily, she has covered big-ticket litigation for more than 20 years. Frankel’s work has appeared in The New York Times, Newsday, The American Lawyer and several other national publications. She is also the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.